Moscow Exchange - Some Interesting Developments, But Largely In the Price

There have been several interesting new business developments emerging in Moscow Exchange (MOEX) over the past couple of months, including the launches of the evening session for equities trading, US equities trading and the retail financial services marketplace. While the former has already had a positive impact on trading volumes, it is very early days for the latter two, and at this stage we model minimal incremental revenues from them. For now, it is a case of watch this space. More broadly, we think MOEX can maintain 10-11% annual fee income growth over the next couple of years, but 2021 looks set to be a year of flat earnings as lower interest rates feed into the P&L. We see a decent earnings recovery in 2022 (+9% y-o-y), with possible upside from the new projects maturing. Ultimately, our DDM and P/E valuations give similar outcomes, and we move our target price up by 20% to R150 driven by the 10-13% increases in earnings forecasts and 50 bp cut in our cost of equity to 12%. MOEX's defensive properties and reliable dividend stream (yielding 6.8%, or 6.4% on the Bloomberg consensus) are valuable assets in these uncertain times, but this seems to be mostly priced in, and we keep our HOLD recommendation. > New potential revenue streams emerging. There has already been an uplift to equities volumes since evening trading was launched in late June, and 1Q21 will see a further extension of trading hours for FX and derivatives. The equities evening session is already contributing 6% of volumes two months in. Meanwhile, US equities trading was launched in late August, and averaged R0.6 bln ADT in week two. We think the long-term outlook for this business is promising, but with only about 20 stocks currently traded, liquidity still overwhelmingly concentrated on the St Petersburg Exchange and some technical issues around using ruble settlement, it is too early to make any bold assumptions about this business. We tentatively model MOEX gaining close to 10% market share in US equities by end-2022, implying an incremental R0.4-0.5 bln fee income in 2022. As for the marketplace, the full live launch kicks off in October, with media reports saying Gazprombank, the third largest retail deposit-taker, has signed up, among others. For now, we model around R0.1 bln incremental revenues in 2022, given there remains a lot of uncertainty about how this platform will fare. So, between them, roughly R0.5 bln revenues would represent about 1.5% of 2022's fee income. > Fee income rising to 76% of revenues by 2022. MOEX's 2020-24 strategy targets fee income contributing 70% of revenues, but this feels conservative to us. We see fee income rising from 66% of operating income in 1H20 to 76% by end-2022, with a 15% 2020-22 fee CAGR compared with -10% for NII. This should support the long-term re-rating of the stock. Our target price implies a 2021 P/E of 14, close to where the Polish and South African exchanges trade. > We are 5-8% above the consensus on 2021-22 earnings. We raise our 2020-22 fee income assumptions by 10-13%, driven by higher trading volumes. We also raise our 2020-22 NII by 2-10% on slightly higher yields. We tweak costs to give a 7% 2020-22 costs CAGR. Our updated earnings put us 5-8% above the Bloomberg consensus for 2020-22 net income.> Much that is reassuring, but close to fair value. There is much that is reassuring about MOEX, including its defensive qualities as geopolitical risks rise, and its solid dividend, currently yielding 6.8% on our numbers and 6.4% on the Bloomberg consensus versus the sovereign's 6.2%. We think these factors will underpin the stock at the current levels. That said, we also think 2Q20 was the earnings peak for MOEX, with 3Q20 trading volumes in segments such as securities starting to soften and core NII also heading down toward a "new norm" of around R3 bln a quarter. We like some of the new initiatives, but we need to see how long it will be before they start having a meaningful revenue impact. All added together, and given the current valuations, the stock remains a HOLD.